A Model of Momentum and Market States: Theory and Evidence

55 Pages Posted: 2 Nov 2014 Last revised: 28 Mar 2019

See all articles by Liang Ma

Liang Ma

University of South Carolina - Darla Moore School of Business

Date Written: October 30, 2018

Abstract

I develop a model that connects market states and momentum. The model analyzes asset pricing implications of two well-known psychological biases, overconfidence and self-attribution bias, in a setting of multiple risky assets whose payoffs contain a common factor. Due to self-attribution bias, overconfidence varies asymmetrically between winners and losers, resulting in asymmetric return behaviors between them. The model generates a set of implications regarding the relation between market states and momentum and long-run reversals. I find empirical evidence consistent with these implications.

Keywords: momentum, long-run reversals, overconfidence, self-attribution bias, market states

JEL Classification: G4, G12, G14

Suggested Citation

Ma, Liang, A Model of Momentum and Market States: Theory and Evidence (October 30, 2018). Available at SSRN: https://ssrn.com/abstract=2517168 or http://dx.doi.org/10.2139/ssrn.2517168

Liang Ma (Contact Author)

University of South Carolina - Darla Moore School of Business ( email )

1014 Greene Street
Columbia, SC 29208
United States
803-777-6366 (Phone)

HOME PAGE: http://sites.google.com/site/liangmaweb/

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